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Yuan strengthens as markets welcome resumption of U.S.-China trade talks

HONG KONG, Sept 5 (Reuters) - The yuan climbed on Thursday after China said there will be high-level trade talks with the United States in early October in Washington, raising hopes that the bitter conflict between the world's two largest economies will de-escalate. The news came after the two countries' top negotiators - China's Vice Premier Liu He, central bank governor Yi Gang, U.S. Trade Representative Robert Lighthizer and U.S. Treasury Secretary Steven Mnuchin - spoke on the phone.

Spot yuan traded at 7.1340 per dollar at midday, 0.15% stronger than the previous late session close and 0.69 percent softer than the midpoint, which was set at 7.0852 by the People's Bank of China prior to Thursday's open. The yuan started strong, taking it close to 7.12 to the dollar. But some of the gain was pared as investors with U.S. dollar demand seized the window of a firmer yuan to scoop up funding, said one trader in Shanghai. Traders were cautious about expecting too much from the October trade talks. "We assume China and the United States will engage in a long (trade) war, hence (we) must stay clam, neither pessimistic nor optimistic," said another trader, who added there is resistance taming yuan strength at the 7.1 barrier. A third trader in Shanghai, who works for a foreign bank, said "if our economic fundamentals are still weak, depreciation is a positive (to fend off tariff pressure). The overall trend is still one of depreciation, the issue is the pace." On Wednesday, China's cabinet said "downward pressure on the economy is increasing" and that it will implement both broad and targeted cuts in the reserve requirement ratio for banks "in a timely manner". The yuan may get a lift from foreign investors after JPMorgan said on Wednesday it will add Chinese government bonds to its widely tracked emerging market local currency bond index from February 2020, over a 10-month period. The move could bring $20 billion of inflows to China from passive investors, Citi's analysts said in a note on Thursday. A Reuters poll on Thursday suggested Chinese authorities will allow the yuan to weaken further against the dollar to fight the trade war and to aid ailing economic growth, while maintain a tight grip on the currency. Poll responses were collected before the news of resumed trade talks. The offshore yuan was trading 0.03% softer than the onshore spot at 7.136 per dollar. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 91.19, slightly firmer than the previous day's 91.09.

The yuan market at 4:05AM GMT:

ONSHORE SPOT:

Item Current Previous ChangePBOC midpoint 7.0852 7.0878 0.04%Spot yuan 7.134 7.145 0.15%Divergence from 0.69%

midpoint*

Spot change YTD -3.66%Spot change since 2005 16.01%

revaluation

Key indexes:

Item Current Previous ChangeThomson 91.19 91.09 0.1

Reuters/HKEX CNH index

Dollar index 98.486 98.451 0.0

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan 7.136 -0.03%*Offshore 7.193 -1.50%

non-deliverable forwards

**

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .

(Reporting by Noah Sin; Additional reporting by Jindong Zhang in Shanghai; Editing by Richard Borsuk)